Ghost Bites (Bytes | EOH | Famous Brands | Kore Potash | Renergen)

If you enjoy Ghost Bites, then make sure you’re on the mailing list for a daily dose of market insights in Ghost Mail. It’s free! SIGN UP >>>

The market took a bite out of Bytes on Wednesday

A drop in the share price of over 10% greeted the latest results

Bytes is a leading software, security and cloud service specialist. The company was spun out of Altron, giving investors the opportunity to own a UK-focused tech company on the JSE.

Based on a skim of the results, it’s not obvious why the market didn’t like them. Revenue increased by 27.9% and gross profit was 23.8% higher (admittedly a deterioration in gross margin). Operating profit was 17.7% higher and headline earnings per share was up 17.4%.

The interim dividend per share is 20% higher at 2.4 pence.

As you keep reading, an issue emerges that might explain the market reaction. The cash conversion of profits has deteriorated dramatically, driven by delays in payments from customers. The group hasn’t written off any bad debts and is confident of being paid in full by debtors. Part of the reason is that gross billings to customers is vastly higher than the income retained by Bytes, so any delays in payment of the large amount can destroy the cash conversion ratio.

If you’ve been looking for a range trading stock for your watchlist, check this out:

EOH still needs a solution for the debt

Will Thursday’s results presentation give more details on the balance sheet plan?

If only the income statement ended at operating profit, EOH would be looking good.

In the year ended July 2022, operating profit jumped to R282 million from R147 million. After so many asset disposals, it’s better to look at continuing operations. For only those business units, operating profit increased from R55 million to R100 million.

Sadly, there’s more to an income statement than the operating profit line. Underneath that joyous level, we find the ugliness of the interest expense. This resulted in a headline loss per share of 72 cents, an improvement of 26.5% vs. the loss of 98 cents in the prior year.

Although EOH managed to repay R733 million in debt during this financial year, gross debt was still R1.3 billion as at 31 July 2022. That operating profit seems less enticing now, doesn’t it?

Subsequent to year end, the sales of the Network Solutions business and Hymax SA were concluded, leading to a further R104 million of debt being repaid. There’s still a long way to go.

Even the detailed financial report doesn’t disclose details of the plan to fix the balance sheet. The company talks about “right-sizing the capital structure” and notes that it is a “business imperative” particularly as interest rates are rising. The company expects to finalise the capital structure by early 2023.

Interestingly, the auditors are comfortable with a going concern assumption for EOH. This was achieved through the renegotiation of the senior bridge facility repayment date, which was expected from 1 April 2023 to 31 December 2023.

So what will the plan be for the balance sheet? In my opinion, the likeliest outcomes here are a rights offer and/or a strategic equity investor. Such an investor might be introduced as an underwriter to a heavily discounted rights offer, for example. Either way, I can’t see how the group will manage without a significant equity injection.

Trading at R4.40 per share, I remain grateful that I got out at breakeven above R7 some time ago.

Famous Brands exceeds pre-Covid revenue

Burgers are back, baby

In the six months ended August 2022, Famous Brands managed to beat the revenue achieved in the comparable period in 2019 (with Gourmet Burger King excluded from both periods, as that business is now a distant and very bad memory for the group).

This gives some context to year-on-year growth numbers of 19% for revenue and 121% for headline earnings per share. Unsurprisingly, the recovery in Signature Brands (the full service restaurants) was even more significant than in Leading Brands (the take-away joints).

I have bad news for your calorific habits, as menu prices increased substantially in the first half of 2022 and more increases are expected for the remainder of the year because of inflation.

Speaking of calories, I had a good laugh at this comment:

“While healthy eating continues to gain prominence, it is no longer driven by COVID-19, and consumers also seek indulgence and comfort in their food choices.”

With incredibly strong cash flow generation (cash generated from operations was 7% higher than EBITDA), shareholders don’t need to head for the ice cream queue to feel better about these results. Net debt to EBITDA is down to 1.98x from 4.4x a year ago, a far more palatable level.

A disappointment in the result was the performance of the Retail division (e.g. Steers sauce in the supermarkets). Sales grew by 15% to R121 million, yet an operating loss of R1.9 million was incurred due to product write-offs. The profit in the comparable period was only R0.3 million. If you think the food production industry is easy, you are horribly mistaken.

Going forward, the question is around how Famous Brands will grow. We’ve seen how well offshore acquisitions went, so hopefully there won’t be many (or any) of those. Existing brands like Debonairs can expand internationally, with the pizza chain opening its first restaurants in Oman and Saudi Arabia.

I continue to scratch my head over the lack of a successful Mexican chain in South Africa. For whatever reason, nobody has cracked the Taco Bell or Chipotle code in South Africa. Perhaps I’m alone in my enjoyment of quesadillas.

In the meantime, shareholders can enjoy an interim dividend of 130 cents per share.

A quarterly review of Kore Potash

Here’s a recap for those who haven’t been following this company

Kore Potash owns a 97% stake in the Kola Potash Project and Dougou Extension Potash Project in the Republic of Congo. Rather than being a spud available from your local Portuguese fruit and veg store owner, potash is potassium in water-soluble form that is used primarily in fertilizers.

The company is in exploration phase, so there are no mining production or construction activities currently underway.

Here’s the highlights reel:

• The Engineering, Procurement and Construction (EPC) proposal to construct Kola was provided by SEPCO Electric Power Construction Corporation, the engineering partner of the Summit Consortium
• The consortium now needs to provide a financing proposal based on the EPC terms
• The Minister of Mines of the Republic of Congo decided to remind us of the risks of operating in Africa, by “expressing discontent” with progress and giving the company 30 days to respond

With $6.2 million in cash at the end of September, at least the company can afford good lawyers. I’m just not sure lawyers make much difference in the Republic of Congo.

In reality, the sooner the financing proposal can be obtained, the better. With the EPC proposal still being negotiated, there’s a difficult path still to walk.

Renergen and the inconsistent heating

Although this may sound like a Roald Dahl story, it meant a delay for investors

To Renergen’s credit, the company likes to keep the market appraised of its situation in great detail.

We don’t just know that the commissioning of the plant has been delayed. No, we know that this is because of inconsistent heating from the conduction oil system which was incorrectly installed, an issue that Renergen discovered while testing the helium train.

While fixing the issue, Renergen used the opportunity to connect recently drilled wells, so this takes the plant closer to full design specification.

The priority is to achieve steady state production, with LNG first and liquid helium thereafter. It sounds as though this issue was a three-week delay. The company points out that this plant will run for at least 20 years, so a delay of this nature to prioritise the safety of the plant is a sensible approach.

Little bites:

• Director dealings:
  • Value Capital Partners acquired another R2.2 million worth of ADvTECH shares. This comes through as director dealings with the group has representation on the board.
  • The CFO of Momentum Metropolitan has bought shares worth R504k.

• Nu-World Holdings released results for the twelve months to August. These are numbers that the company will hope to forget, as South African revenue fell by 14.2% in an environment of weak consumer discretionary spending. Offshore revenue was up by 14.2%, primarily due to a stronger dollar. Overall, revenue fell by 8.8% and HEPS was 39.9% lower at 394.1 cents. This puts Nu-World on a Price/Earnings multiple of 6x. A final dividend of 149.8 cents has been declared. This relatively illiquid stock has experienced a share price decline of nearly 24% this year.

• MiX Telematics has released a trading statement for the six months to September 2022. Based on reported earnings, the company has slipped into a headline loss per share position of -0.5 cents (vs. headline earnings per share of 13 cents in the comparable period). The primary driver is a non-cash deferred tax charge of R60 million, with non-recurring acquisition costs of R12.8 million also not helping. Without those charges, the business is still profitable and intends to declare a dividend for the second quarter.

• Zeder’s special dividend of 10 cents per share has received SARB approval and will be paid on 14 November with a last day to trade of 8 November.

• The merger of Capital & Counties Properties and Shaftesbury was approved by shareholders in July. Regulatory approvals are still outstanding and the merger is expected to take place in the first quarter of 2023. The companies plan to pay dividends as usual in the fourth quarter of 2022 and will make separate announcements in this regard.

• In case you’re a small business owner struggling to stay on top of financial reporting obligations, you should feel better knowing that Efora Energy (currently suspended from trading) is still busy finalising its 2021 results.

• Transcend Residential Property Fund has appointed two directors to the board after recent resignations. Tshepisho Makofane and Panico Theocharides have joined the board.

• Speaking of new directors, Huge Group has announced a director appointment after unexpected recent resignations of a few directors. Conway Williams has joined the board.

INVEST IN SHARES